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GDP Explained (with Idli)

Rahul-Mandre

By Rahul Mandre,
Data Scientist-Business Analytics, Tata Asset Management

GDP is the buzzword currently, let's look at GDP and its constituents to understand what factors will play crucial role if the GDP is to be revived !!

What is GDP?

Imagine there is an island called 'ABC' where only 4 people reside, a farmer, a grocery seller, an idli-wallah and a Fertilizer manufacturer. The farmer sells rice, methi (fenugreek) seeds and urad dal to the grocery man. The grocery man converts rice into flour and sources some other materials like cooking oil from the neighbouring island. The idli-wallah buys this stuff from our grocerier and makes some delicious Idlis which are bought by the farmer for a fair price. Remember, there is one more person on this island, a Fertilizer manufacturer who had sold Fertilizer to the farmer. The grocery man sells extra fenugreek to the neighbouring island.

Let us list all the items sold on this island

ItemRateQtyAmount
Rice (farmer - grocerier - idli wallah)Rs. 30 per kg1 kgRs. 30
Fenugreek (farmer to grocerier)Rs. 60 per kg1 kgRs. 60
Fenugreek (export by grocerier)Rs. 80 per kg900 gRs. 72
Urad Dal (farmer - grocerier - idli wallah)Rs. 30 per kg1 kgRs. 30
Rice flour (grocerier - idli wallah)Rs. 35 per kg1 kgRs. 35
Cooking Oil (import by grocerier)Rs. 90 per kg1 kgRs. 90
Cooking Oil (grocerier to idli-wallah)Rs. 100 per ltr1 ltrRs. 100
Idli Plate (idli wallah to farmer)Rs. 1001Rs. 100
Fertilizer (manufacturer to farmer)Rs. 100 per kg1 kgRs. 100

It's time to introduce definition of GDP, which is

'Market Value of all the finished goods and services produced within the country'

Can you identify which item can be classified as finished goods in above table.

The rice, fenugreek, urad dal and cooking oil is bought by grocerier and then idli-wallah, who uses these items to make idli which is for sale, hence these are Intermediate Goods whereas Idli is consumed by farmer, so it is Finished Goods. The Fertilizer is bought by farmer who keeps it, so it is also Finished Goods.

However, remember the Grocery man exports extra Fenugreek seeds. This amount will be added in GDP. Whereas, the cooking oil was imported by him, so we will have to deduct the amount spent by grocerier for cooking oil.

ItemRateQtyAmountType
Rice (farmer - grocerier - idli wallah)Rs. 30 per kg1 kgRs. 30Intermediate
Fenugreek (farmer to grocerier)Rs. 60 per kg1 kgRs. 60Intermediate
Fenugreek (export by grocerier)Rs. 80 per kg900 gRs. 72Export
Urad Dal (farmer - grocerier - idli wallah)Rs. 30 per kg0.5 kgRs. 15Intermediate
Rice flour(grocerier - idli wallah)Rs. 35 per kg1 kgRs. 35Intermediate
Cooking Oil (import by grocerier)Rs. 90 per kg1 kgRs. 90Import
Cooking Oil (grocerier to idli-wallah)Rs. 100 per ltr1 ltrRs. 100Intermediate
Idli Plate (idli wallah to farmer)Rs. 1001Rs. 100Finished
Fertilizer (manufacturer to farmer)Rs. 100 kg1 kgRs. 100Finished

It is important to note that if the farmer had bought Rice flour directly from our grocerier, then that transaction will also be counted in Finished Goods.

So finally, The GDP of this island is : Idli Plate (Rs. 100) + Fertilizer (Rs.100) + Fenugreek Export (Rs. 72) - Cooking oil import (Rs. 90) , that is Rs. 182.

That is the formula for GDP then,

If farmer decides to not buy idli and the idli wallah has to discard the idli, GDP of the island will be severely impacted.

We still left out two important components that constitute GDP which are Government Spending and Total Investments. But we can only safely assume our island doesn't need a Government yet, does it? We also ignored raw materials required for Fertilizer for simplicity.

Hope you liked our explanation of GDP. It’s clear that increase in Consumption is very important for recovery in GDP, let us know your views on Twitter.

Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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